Invested Capital
Encyclopedia
Invested Capital represents the total cash
investment
that shareholders and debtholders have made in a company
. There are two different but completely equivalent methods for calculating invested capital. The operating approach is calculated as:
Invested capital = Operating Net Working Capital + Net Property, Plant & Equipment + Capitalized Operating Leases + Other Operating Assets + Operating Intangibles – Other Operating Liabilities – Cumulative Adjustment for Amortization of R&D
Equivalently, the financing approach is calculated as
In symbols:
Invested capital is used in several important measurements of financial performance, including return on invested capital, economic value added
, and free cash flow
.
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
that shareholders and debtholders have made in a company
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
. There are two different but completely equivalent methods for calculating invested capital. The operating approach is calculated as:
Invested capital = Operating Net Working Capital + Net Property, Plant & Equipment + Capitalized Operating Leases + Other Operating Assets + Operating Intangibles – Other Operating Liabilities – Cumulative Adjustment for Amortization of R&D
Equivalently, the financing approach is calculated as
| Invested capital = | Total Debt and Leases |
| + | Total Equity and Equity Equivalents |
| – | Non-Operating Cash and Investments |
In symbols:
Invested capital is used in several important measurements of financial performance, including return on invested capital, economic value added
Economic value added
In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
, and free cash flow
Free cash flow
In corporate finance, free cash flow is cash flow available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders, and so on....
.
Operating approach
| Current Operating Assets | 2,000 | |
| (Non-Interest Bearing Current Liabilities) | (800 | ) |
| Net Working Capital | 1,200 | |
| Net Property, Plant, and Equipment | 4,800 | |
| PV of Non-Capitalized Lease Obligations | 400 | |
| Goodwill and Intangibles | 1,600 | |
| Invested Capital | 8,000 |
Financing approach
| Short Term Debt | 300 | |
| Current Portion | 500 | |
| Long Term Debt | 2,300 | |
| PV of Non-Capitalized Lease Obligations | 400 | |
| Total Debt and Leases | 3,500 | |
| Common Stock | 600 | |
| Additional Paid-In Capital | 1,900 | |
| Retained Earnings | 1,500 | |
| Bad Debt Reserve | 200 | |
| LIFO Reserve | 500 | |
| Capitalized R&D Expense | 1,000 | |
| Capitalized Marketing Expense | 300 | |
| Total Equity and Equity Equivalents | 6,000 | |
| (Marketable Securities) | (1,500 | ) |
| Invested Capital | 8,000 |